Monday July 30 1:43 PM ET

Argentina's Austerity Bill Is Finally Passed

By Simon Gardner

BUENOS AIRES, Argentina (Reuters) - The Argentine government's key austerity bill was finally passed by Congress on Monday in a move seen as crucial to allaying fears of a debt default and helping the sickly economy clamber out of crisis.

After an all-night debate, the opposition-dominated Senate approved the unpopular bill to end deficit spending and slash state salaries and some pensions by up to 13 percent, in an
eagerly-awaited predawn vote.

International markets from London to New York rallied on the back of the belated passage of the bill, mired in the Senate since last week amid intense talks between the government and the main
opposition Peronists.

The stalled debate had transfixed investors amid fears a meltdown in Latin America's No. 3 economy and the region's biggest sovereign debt borrower could rock the global economy and spark
the kind of regional spillover seen after Mexico's 1995 peso crisis.

President Fernando de la Rua's center-left coalition government had pressed for his austerity plan to calm investor fears of a default on the nation's $128 billion debt by slashing public spending to no more than tax revenues.

``As far as political fears go, there is no better (tonic) than this bill,'' said Cabinet Chief Chrystian Colombo, who had anxiously watched the start of the debate from a gallery with other top officials -- a sign of just how much was at stake.

``Laws are passed in Argentina, they are debated, but agreements and consensus are reached between the majority parties,'' he added, seeking to knock down criticism of the constant squabbling inside and outside the ruling coalition.

The government has lurched from crisis to crisis after a $40 billion aid package in December and a multibillion debt swap earlier this year failed to restore confidence in an economy trying to grow out of a three-year rut.

INVESTORS CHEER

Investors welcomed the Senate's thumbs up, saying the government finally showed signs of the political cohesion that markets say is needed to achieve a ``zero deficit'' budget.

``We think the decisive parliamentary step...is a clear sign of political consensus, an element necessary to try to reach the ``zero deficit'' goal and clear away growing investor doubts,'' analyst Rafael Ber of Argentine Research said.

But there was little solace for the man on the street, who feels the nation's poorest have been given a raw deal and that there is a long recession in store thanks to the bill, which has already prompted strikes in a land with unemployment of 16.4 percent and a third of the population living in poverty.

``We are lost. The economy is a disaster. The government does nothing for the people,'' said disgruntled Manuel Lopez as he tended his toasted peanut stall in downtown Buenos Aires.

``The (pension and salary) cuts are unnecessary, unsustainable and any benefit will only by temporary. There is no real consensus between the politicians. All they ever do is fight,'' he added. ``I think we're in for a long recession.''

NEW CHALLENGE

Leading daily La Nacion cautioned that the onus was now on the government to actually implement the cuts and not relent if faced with further public opposition in the wake of recent strikes to protest its spending cuts.

``Argentina continues on the tightrope,'' La Nacion said in a front page editorial. The government ``must show that it has a real will to implement it and the capacity to resist the many pressures from different sectors.''

In a show of displeasure with the cuts, the opposition Peronists sent only enough Senators to give the bill a quorum. However, providing quorum showed the Peronists recognized the importance of the bill for Argentina's future.

If the Senate had insisted on changes in the bill's details, it would have had to return to the lower house for another final vote, a move which would have likely seen Argentina's punished stocks and bonds hammered.

Emerging market debt firmed on Monday on the Senate vote, with Argentine bonds climbing and the closely watched country risk premium Argentina must pay to entice investors away from safe-haven U.S. Treasuries narrowing sharply.

Argentina's leading Merval share index was up 1.36 percent by midday, while local securities eased some after sharp early morning gains. Argentina's benchmark Global 2008 dollar bond was
2.18 percent, or 1.250 points firmer to bid around 58.625 points.

Country risk as measured by J.P. Morgan Securities EMBI Plus index narrowed 97 basis points to 1,518 basis points -- which however still means Argentina is perceived as a riskier investment than the likes of Russia, Turkey and Ecuador.

The Argentine economy ministry meanwhile denied reports Cavallo was poised to head to Europe to seek additional loan commitments and ask lenders including the International Monetary Fund for early aid disbursements.

(Additional reporting by Alistair Scrutton)

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